Property Tax Post: States Starting to Push Back on Prepayment Issue



Although the 2017 tax season has officially come to an end, the debate over whether property taxes prepaid before Dec. 31, 2017, in response to Pub. L. No. 115-97 (the 2017 tax act) can be taken as a deduction on 2017 federal income tax returns continues. While some states seem to be looking forward to strategies for preserving the full SALT deduction in coming years, others are still trying to ensure that their residents will be allowed any deductions taken for prepaid property tax. These efforts have persisted, despite IRS guidance stating that prepaid property taxes are only deductible for 2017 if they were assessed prior to the end of the year.

States vary in how aggressively they are attempting to protect the deduction for the 2017 tax year. Legislators from New York and New Jersey sent correspondence to the IRS earlier this year, actively advocating for prepaid property taxes to be allowed as deductions. The Minnesota Department of Revenue also sent correspondence to the agency, but with a somewhat softer tone. The state merely requested that the IRS provide guidance as to whether Minnesota’s property taxes would be considered to have been assessed in 2017 (as of publication, the IRS has yet to respond to this request).

Illinois has taken a different approach. While the state has not waded into the issue of federal tax deductions, it has directed taxpayers that property taxes prepaid in 2017 may be included in the Illinois Property Tax Credit on state income tax returns. This provides taxpayers with assurance that they will receive at least some benefit for any property taxes they prepaid without clear federal guidance.

Finally, New Jersey has recently passed legislation in an attempt to clarify the issue for its residents. Instead of trying to determine whether prepaid property taxes in the state had been “assessed” during 2017, it updated its property tax statutes retroactively to July 1, 2017. Under the new law, property taxes may be paid prior to the issuance of a tax bill by the local taxing authority. The hope is that this change will make Garden State residents who prepaid property taxes eligible for the full federal deduction.

Despite the fact that Tax Day has already come and gone, these recent developments serve as a reminder that controversy over property tax prepayments may continue several years into the future, as late filers submit their returns, audits are commenced, and litigation is initiated. Regardless of how the issue is finally settled, there is little doubt that we will continue to hear more about it in the future.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Which states’ taxpayers will ultimately be allowed to take a federal deduction for property taxes prepaid in 2017?

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